BOCA RATON, FLA. - The once-rapidly growing auto lease sector of the ABS market has likely reached maturity and growth will be limited for the foreseeable future, panelists speaking at Information Management Network's ABS East gathering said. The seemingly infinite use of subvention loans as well as a lack of new issuers mean that auto lease volume has likely peaked and is seen leveling off from here on out.
The hot-button issue in the auto lease sector - residual value - has not been helped by the zero-percent loans that many captive auto lenders have unveiled in the past 18 to 24 months, depressing the market for used autos and reducing the pool of potential lessees, noted Jeff Orr, managing director at Banc One Capital Markets.
But lease originations will not decline further, as "there is a core group of drivers who will always lease because they want to continually drive a new car," according to Moody's Investors Service Vice President Mark Cohen. Additionally, existing lessors are entering the securitization market with new issuance programs is unlikely.
But the fleet-lease aspect of the sector remains strong, despite challenges faced in recent bankruptcies, and is seen continuing to make up the overwhelming majority of auto leases securitized.
The conservative approach taken by issuers and rating agencies in accounting for residual value is a strength of existing transactions, Moody's Cohen added. "ABS accounting and enhancement levels in securitized lease pools are based on the base, or minimum, residual value of the car, rather than the contract repurchase value," Cohen said.
As for the recent action by Standard & Poor's to place every auto lease ABS on watch for a downgrade, there has been little to no fallout, panelists agreed. "S&P caused a firestorm by placing certain auto lease deals on watch but there have been no downgrades and most ratings have been confirmed at the current levels," said session facilitator Stuart Litwin, partner at Mayer, Brown Rowe & Mawe. He added that one issuer - Provident Bank - altered its trust to conform to S&P's standards.
Overall, the auto lease sector has been a success, growing exponentially since 1997. Although leasing has become a less attractive option for consumers, it remains a valuable funding method for auto lenders seeking to diversify funding sources and expand asset sources for securitization, panelists said.
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